3 ways U.S. payment tech is behind the times

Could microchips and biometrics prevent future data breaches?

As the fallout from the Target
TGT, -0.09%
breach continues to spread—last Monday, police said they arrested two Mexican citizens who had fraudulent credit cards linked to the stolen data—many Americans are asking themselves how they can keep their payment information more secure. The answer, it seems, may come from Europe, Canada, India and South Africa, countries that are ahead of the curve compared with the U.S.

Here are three payment technologies popular around the world that the U.S. hasn’t embraced.

Chip-based technology from the U.K. and Canada

In the U.K. and Canada, credit cards come embedded with microchips that make them harder to counterfeit or copy. The basic magnetic stripe cards used by most Americans are more vulnerable to the kind of data theft that happened with Target, experts say. (Only an estimated 15 to 20 million of the 5.6 billion credit and debit cards in the U.S. have chip-based technology; many of those were likely issued to people who travel overseas often). “The U.S. is behind many other countries with this,” says Denee Carrington, a senior analyst at Forrester Research.

Target’s CEO Gregg Steinhafel is now calling for stores and banks to adopt chip-based cards (though he killed a $40-million program to use the chips across more than 1,000 stores about a decade ago claiming in a recent interview with CNBC that Target was “out front of the industry, and the industry didn’t follow”). But this time around, he thinks the industry will follow. Rick Oglesby, a senior analyst at Boston-based Aite Group, also thinks that we’ll soon see significant adoption of this technology in the U.S., and that it will “look a lot like it does in Europe.”

Mobile payments in Japan, Kenya and India

“The future of [payment] tech is in mobile devices,” says John P. Pironti, a risk adviser with IT firm ISACA and president of IT consulting firm IP Architects. Research firm Gartner predicts that world-wide mobile payment transaction values will reach $235.4 billion in 2013, a 44% increase from 2012; in North America, the market in 2013 was only expected to hit $37 billion, just half of the $74 billion predicted for the Asia/Pacific region and the $83 million in Africa.

The South African Social Security Administration debit card

Indeed, some people in other countries pay for far more types of items using their cellphones than we do in the U.S., explains Andy Brennan, an analyst with research firm IBISWorld. These countries include Japan and some Scandinavian countries, says Pironti. Kenya is another impressive case study because it was one of the first mobile payment systems to be widely adopted across a whole nation. The peer-to-peer service is called M-Pesa—launched in 2007 by Safaricom, the country’s largest cellphone network—and lets users send, receive and store money using their mobile phones. M-Pesa has roughly 18 million active subscribers who transfer roughly $21 billion annually by doing everything from buying groceries and paying medical bills to sending family members money in rural parts of the country. In India, a similar service called MoneyOnMobile has more than 75 million users.

Oglesby says that while these technologies are impressive, U.S. merchants will have an even more robust system in the coming years. That’s because they’ll be using such technologies to geo-target consumers and collect data about them. Pironti says he expects so-called contactless mobile payments—where you don’t even have to take the phone out of your pocket to pay—to gain a lot of traction. And these payments could be more secure than a simple credit card, experts say, because they could let your bank know where you are. For example, while a retailer is trying to process a payment via your mobile phone, your bank would know if you’re in the store based on your phone’s whereabouts.

Biometrics in South Africa

Plastic credit cards aren’t going anywhere anytime soon, but they may come with some added security. The South African Social Security Administration now uses a debit card with biometric functionality to disburse pension, disability and public assistance moneys to recipients. To get the card, South Africans must have their fingerprints and voices analyzed by a computer. To get their monthly payments, they then must place their fingertip on a biometric reader and speak into a microphone, which helps ensure the recipient is who they’re claiming to be. More than 10 million South Africans now get payments this way.

Oglesby says that biometrics may be used for payments in the future in the U.S. but may look different than this. He thinks as mobile phones begin to use more biometric identification like fingerprints to authenticate users, such technologies will get integrated into mobile payment systems. ATMs may also use biometric technology to verify users (Citibank ATMs in Asia began experimenting with this last year.)

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